Earnings surprises are a good thing, if the news is good. And it certainly is for EMCOR Group (NYSE: EME).
Norwalk, CT-based EMCOR is a $6-billion-a-year conglomerate that provides the materials and services required to construct all sorts of new buildings—electrical, heating and air conditioning, security, power generation, as well as maintenance and management once the buildings are up and running.
Construction-related mechanical and electrical services bring in roughly 80 percent of EMCOR’s revenue, and building maintenance and management the rest.
Leading Edge
The construction services industry doesn’t have high profit margins, and it’s extremely competitive because virtually every new major construction contract results in a fierce bidding war. Still, EMCOR’s seasoned management and some strategic acquisitions have allowed it to generate healthy returns the past decade, despite the economic downturn. Now, the tide is turning in EMCOR’s favor.
Non-residential construction in the US, where virtually all of EMCOR’s business is, has grown about 5 percent annually, on average, during the past 25 years. During the economic downturn (2008-2010), non-residential construction tanked. But we are slowly returning to this average rate, resulting in a lot more business for EMCOR, which has 170 locations nationwide and employs 26,000 people.
EMCOR caters to a wide variety of markets, some of which continue to cut back on spending: health care, government, water/wastewater and transportation. But this is being more than offset by demand from private industry, both the commercial and industrial sub-sectors. EMCOR’s total backlog was recently at $3.28 billion, up 3 percent from June 2012, due to a $193 million increase in industrial sector work.
EMCOR continues to get contracts from Uncle Sam, despite the budget cuts. Recently, for instance, it won a US Army contract to provide support services at Fort Huachuca in Arizona. The project began last November and is expected to bring in some $43 million over five years.
Surprise, Surprise
Six Wall Street analysts currently follow EMCOR. In each of the past three quarters, EMCOR has topped their consensus earnings estimates by an average of 12 percent. On October 2012, for example, EMCOR reported especially good third-quarter results, with earnings of 59 cents, 9 cent per share more than the analysts expected. Further, earnings were up close to 26 percent year over year.
We think these happy surprises are likely to continue into 2013, driving the share price up another 14 percent or so, to around $40.
For the nine months ended September 2012, net income jumped 17 percent to $1.48 cents per share, on nearly a 16 percent increase in revenue. And profitability has been escalating—profits were up 22 percent in the third quarter on an 8 percent revenue rise.
EMCOR is expected to earn $2.08 per share in 2012, $2.48 in 2013 and $2.96 in 2014, which makes for a nice trend line. In addition, the company announced a 20 percent dividend increase in December, bringing its annual payout to 24 cents a share (less than 1 percent yield).
EMCOR stock is up about 30 percent in the past year; it was recently trading at 16 times 2013 estimated earnings vs. around 14 times for its peer group. We think the premium valuation is justified, given the company’s above-average growth rate and strong fundamentals. Also worth noting is that EMCOR’s price-to-sales ratio is relatively low: 0.37 vs. 0.56 for its peers.
Our 12-month price target for EMCOR Group is 40.
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Greg Pugh, an income-investing expert, publishes a newsletter called Investing for Monthly Income.
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